[Congressional Record Volume 157, Number 38 (Monday, March 14, 2011)]
[Senate]
[Pages S1594-S1595]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         CFTC HEDGING AUTHORITY

  Mr. NELSON of Florida. Mr. President, you hear a lot of talk about 
the trouble in the Middle East, and people are saying that oil prices 
are going up and, therefore, the pain at the gas pump is being felt 
because there is this shakiness in the oil markets. You hear the 
commentary: Well, we ought to be solving this problem by drilling more 
in the United States. In essence what people are talking about is they 
want to drill more in the Gulf of Mexico. Of course, there is plenty of 
opportunity to drill in the Gulf of Mexico. There are 30 million acres 
that are already under lease that have not been drilled. There are 7 
million acres that are being drilled under lease, but there are an 
additional 30 million acres in the Gulf of Mexico under lease, so there 
is plenty of opportunity. There is a lot more opportunity for domestic 
drilling.
  But what I want to talk about today is, it is this simplified message 
that if we drill more domestically--which we clearly have the capacity 
to--that is going to solve the problem. That is not the problem, and 
that is not the reason for why the gas prices are going up as they are.
  I will grant you that whenever there is an oil-producing region of 
the world where there is a disruption, then that does have some effect 
on the price of oil. But what we have seen is an extraordinary spike in 
the last couple of months in the price of oil. I want to try to point 
out to the Senate why this Senator thinks, and a number of my 
colleagues join me, that spike in gas prices is going up.
  There is further evidence that our energy markets are no longer 
governed just by the economic dictums of supply and demand when it 
comes to oil prices. That is what I want to talk about. It is simply 
this: The speculators are back. We saw the speculators in oil futures 
contracts. We saw their handiwork 2 years ago when the price of oil hit 
an all-time high of $147 a barrel. This time the speculators are 
seizing on the turmoil in the Middle East and North Africa to use that 
as an excuse to drive this price of oil sky high. Yet recent upheavals 
abroad have had little, if any, effect on the actual supply of oil.
  Again, coming back to the economic theories of supply and demand, 
Libya, for example, controls only 2 percent of the world's oil supply. 
Well, there is a key piece of evidence that points the finger at these 
``condo flippers'' in the commodities market. Data from the Commodity 
Futures Trading Commission, the CFTC, reveals that since January, when 
the protests began in Egypt, speculators have increased their

[[Page S1595]]

betting on future oil price increases by more than 38 percent.
  Meanwhile, legitimate hedgers for oil futures contracts, legitimate 
hedgers such as airlines and shipping companies and oil companies have 
actually reduced their holdings in oil futures contracts.
  All you need to do to see what is happening is as represented on this 
chart. You see closely how the rise of oil prices, the red line, tracks 
the increases in speculative activity, the white line. A long position 
in a futures contract means you are betting that the price of oil will 
go up and, therefore, you buy a contract to buy oil at a determined 
amount in the future. That is what this chart is about.
  As you go over here, on January 25 of this year, the day the protests 
began in Egypt, the speculative money was on long held positions in 
just over 217,000 West Texas Intermediate crude oil futures contracts. 
West Texas Intermediate crude is the standard by which they judge. When 
the protests began in Egypt, they were down at 217,000 futures 
contracts. That is the equivalent of about 217 million barrels of oil. 
On March 8, the last day for which we have the data, these same 
speculators held the equivalent of more than 301 million barrels of 
crude, which was an increase of 38 percent, from 217,000 to 301 
million.
  Look how closely the price of oil tracks those swings. This is the 
speculative buying or betting in futures contracts, the white line. 
Look how closely the price of oil follows the red line.
  During the same period, from January 25 to March 8, the price of oil 
climbed from $85 a barrel all the way up to $105 a barrel. That is an 
increase of nearly 24 percent. Guess who is the loser in this game of 
profit gouging. It is the American consumer. Our gasoline prices mean 
less money for anything the American consumer has to buy. And, at the 
end of the day, guess who else is the big loser. It is the American 
economy.
  These speculative bubbles in oil prices are becoming more and more 
common. We saw it in the summer of 2008 when oil spiked up to an 
unbelievable $147 per barrel, only to plummet almost 80 percent a few 
months later. You cannot say that going from $147 a barrel all of a 
sudden down to $30 a barrel back in 2008 had anything to do with supply 
and demand. There had to be another influencing factor.
  Because of this, last year when we passed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, Congress empowered the CFTC to rein 
in excessive speculation to keep the commodities markets from flying 
off the rails. Just look. It is in the last 2 months. Yet, the 
Commission, the CFTC, has yet to finalize new rules to govern the 
speculative position limits.
  Meantime, what happens is speculators continue to buy $100 worth of 
oil futures with $6 down, 6 percent down to buy oil contracts for 
futures. I believe the law we passed last year has given the CFTC an 
extremely effective tool at its disposal that it could use to 
discourage excessive energy speculation and bring down gas prices our 
American consumers are now finding hurting their pocketbooks so much. 
That authority is the authority to impose higher margin requirements on 
oil futures contracts. So instead of $6, they could require that there 
be more than 6 percent they would have to pay down on buying a futures 
oil contract.
  In the current system some ordinary investors have to put down as 
much as 50 percent in order to buy things, while financial speculators 
have to post only 6 percent to buy a futures contract in oil. That does 
not seem to me to be fair and is leading to this kind of system which 
is now causing pain at the pump.
  These kinds of margin requirements are not set by Federal regulators 
but, rather, by the exchanges themselves. For the same reason we do not 
let pharmaceutical companies approve of their own drugs, we should not 
let futures exchanges self-regulate by setting their own margin 
requirements. Fortunately, in a section of the Dodd-Frank bill, section 
736, Congress removed the broad statutory restriction that prohibited 
the CFTC from setting those margin requirements. That section 
authorizes the CFTC to call for higher margin requirements in order to 
protect the financial integrity so this kind of event does not happen.
  I am calling on the CFTC now to exercise the authority the Congress, 
signed into law by the President, gave them last July. I am asking them 
to get going.
  There is a letter that has been circulated here among the Senators 
encouraging the CFTC to use the Commission's power to increase margin 
requirements on these oil speculators. I want to urge my colleagues who 
are listening to join in this letter as it is circulated among your 
offices. Under the Dodd-Frank Act, these new margin requirements would 
take effect as soon as July. But the CFTC must begin the rulemaking 
process now, because if we do not, and get into the summer driving 
season, you know what is going to happen here. This is March. It is 
going to keep going up and up.
  I want to be clear, that where those who have a legitimate reason, 
such as airlines, shipping companies, oil companies, to buy future 
contracts, that margin level would not apply. It will only apply to the 
speculators. Imposing a higher margin level on speculators is 
consistent with existing exchange practices. For example, the New York 
Mercantile Exchange, the major trading platform on oil futures, imposes 
different margin rates on speculators as compared to bona fide hedgers. 
Anybody who has been at the gas pump recently knows this is a real 
issue, and they are asking us to do something about it.

  Then we hear in return it is supply and demand. I am trying to prick 
that balloon, bust that bubble. Congress and the administration need to 
be out front doing everything we can to ensure that the price of oil 
reflects the real supply and demand, not the irrational speculative 
fervor. With the right policies, we can discourage the damage excessive 
speculation is doing.
  I ask two things of my colleagues. I ask that they all take a look at 
the letter being circulated to Commissioner Gensler, Chairman of the 
CFTC. Don't fall for the notion that more drilling is going to put an 
end to the spiral. I am all for drilling in all those acres out there 
that are already leased. I am all for it, if it is done safely. But 
guess what we are hearing. We are starting to hear: Drill, baby, drill.
  Facts are stubborn. Even if there was expanded drilling in the United 
States, it is not going to affect the price of gas in the short term or 
even over the next half a dozen years. That is largely because the 
United States holds 2 to 3 percent of the world's supply, which is not 
enough to affect prices globally. Further, the oil and gas companies 
have 30 million acres that are leased but not drilled offshore and 
another 30 million acres onshore and they are not even drilling yet. 
Simply put, attempts to link the recent increases in the price of oil 
to the need for increased drilling are off the mark. Frankly, we 
haven't changed the way we do business with oil companies. 
Unfortunately, it has been a little less than 1 year since the 
Deepwater Horizon oil rig exploded. We know what damage that did to the 
fisheries, the tourism, the economy of the entire gulf region. A lot of 
oil is still there. American citizens continue to fight to get their 
lost claims paid. We are not going to know for years to come what the 
long-term impacts will be, but certainly the economic damage is rising 
and rising.
  Even worse, if another spill happened today, the responsible party 
would still have only a liability cap of $75 million. We have to 
address that.
  In the meantime, we have to confront high gas prices. We need a 
multipronged approach that includes getting the CFTC to do its job.

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